Miners look attractive after falls

Resources stocks have fallen harder than underlying commodity prices in the recent bout of market weakness, to many investors’ chagrin. But players with deep pockets could look to take advantage of this disparity to boost growth or gain access to strategically important resources, triggering an outbreak of consolidation in the sector.

Atlas Iron
,
Paladin Energy
and
Extract Resources
are among the companies that could attract the interest of bidders. China and India, both in desperate need of resources as their economies rapidly industrialise, as well as large diversified miners seeking growth, remain the likely acquirers.

That’s the view of Merrill Lynch resources analyst Peter O’Connor, who reckons other key drivers of consolidation include the need for growth options, access to infrastructure and resource quality.

Earlier this year,
BHP Billiton
and
Rio Tinto
both set aside billions of dollars for capital expenditure and growth, but because of difficulties with previous expansion projects – cost blowouts at BHP’s Worsley Alumina facility being one example – they might get more bang for their buck with acquisitions.

Companies such as China’s Shenhua Energy have also faced state government planning obstacles in developing projects, another reason why buying existing projects rather than trying to develop new ones makes sense.

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Company Profile

Atlas Iron is one of a handful of iron ore companies left on the local bourse without a cornerstone or strategic investor. Its largest shareholder is IMC Resources, with fund managers UBS, Schroeders and Blackrock also on the register.

The company was already producing, had plans to ramp up production and was generating significant amounts of free cash flow, making it a standout candidate for consolidation, Mr O’Connor said.

He told clients that Extract Resources’ exposure to the “world class" Husab deposit could attract the likes of Rio Tinto, already the second-largest shareholder in the company, whose Rossing mine is nearby, or Chinese investors.

Extract’s largest shareholder, Kalahari Minerals, was itself subject to a takeover proposal from China Guangdong Nuclear Power, but the deal fell apart when UK regulators blocked the suitor’s plans to reduce its offer price after the Fukushima disaster saw uranium prices plunge.

Uranium assets were becoming increasingly attractive because of the highly concentrated nature of the industry, and rising barriers to entry as a result of Fukushima, he said.

The “severe retracement" in Paladin’s share price, down more than 50 per cent since March, could boost its appeal in the eyes of suitors, Mr O’Connor said. Its largest share-holder, goldmining giant Newmont Mining, picked up a 6.7 per cent stake through a separate acquisition.

This month, Paladin quashed speculation that Newmont might be looking to offload its stake.